America's energy renaissance is composed of many regions, but Tomas Ackerman, managing director of investment firm Natural Gas Partners, calls the Permian basin "one of the best plays in the world." This is because oil and gas producers are able to achieve 40%-100% internal rates of return on their invested capital.
There are currently about 1,500 oil and gas companies working in the Permian Basin, which accounts for 17% of all oil production in America, with Occidental Petroleum (NYSE: OXY ) being the largest (20% of total basin production).
To achieve such amazing returns on investment, companies like Occidental are turning to new technologies such as horizontal drilling and enhanced oil recovery, or EOR, which uses CO2 and/or water to increase pressures inside oil and gas formations and to increase production by as much as 75%.
Occidental has big plans for its Permian holdings (all 3.6 million acres of them), which are estimated to contain a remaining 7.8 billion barrels of recoverable oil. It plans to increase oil production by 6% (which means $1.8 billion in cash flow) by expanding its Permian production from 180,000 barrels/day to 230,000-240,000 barrels/day by year-end 2014.
Income investors should take note of Occidental's growth plans because -- with a 2.9% yield and a 10-year compound dividend growth rate of 17.3% -- this company represents a great dividend growth opportunity.
To help it achieve its ambitions, Occidental is partnering with Magellan Midstream Partners (NYSE: MMP ) on a joint venture (the largest in Magellan's history) called the BridgeTex pipeline. Both companies are investing $600 million in this venture, which will transport 300,000 barrels/day of oil from West Texas to Houston. The project is scheduled to be complete by the mid-third quarter of 2014 and will have an earnings before interest, taxes, depreciation, and amortization multiple of 8 (meaning it will pay for itself in eight years, a 12.5% rate of return).
BridgeTex isn't Magellan's only investment in the Permian. It is also expanding its Longhorn pipeline (from 225,000 barrel/day capacity to 275,000 barrels/day). The total cost of the project (to be completed in early 2015) is $430 million and has an EBITDA payback period of just three years -- a 33% rate of return.
These pipelines are just two of several major investment projects the partnership is undertaking. Magellan has $1.1 billion in investments scheduled through 2016, and management is reviewing an additional $500 million, 70% of which would be in higher margin crude oil.
With its 13-year track record of 13% CAGR distribution growth and management guiding for 20% growth in 2014 and 15% growth in 2015, income investors should consider Magellan Midstream Partners as one of the best dividend growth stocks in America. Analysts at S&P Capital IQ agree with this sentiment, projecting a 13.7% CAGR distribution growth rate for the next decade.
In addition to Magellan Midstream Partners, Kinder Morgan Energy Partners (NYSE: KMP ) is another MLP cashing in on the Permian oil and gas boom -- but from a different angle. Kinder Morgan is America's largest transporter of CO2 (1.3 billion cubic feet/day), which is the primary input used in enhanced oil recovery.
The company recently announced the $1 billion CO2 "Lobos" pipeline project, a 213 mile pipeline that will service the Permian Basin by transporting 300 million cubic feet/day of CO2 (and increase Kinder Morgan's CO2 transport capacity by 23%).
Though a large project in its own right, the Lobos pipeline, scheduled to be complete in 2016, represents just 25% of Kinder Morgan's CO2 EOR programs (the MLP is targeting $3.9 billion in total investments in CO2 projects.) And that massive investment backlog pales in comparison to the partnership's total project backlog of $16.4 billion, a figure that doesn't even include planned investments in America's largest and fastest growing shale gas formation -- the Marcellus/Utica region.
With such a large total project backlog (one that grew 16% in the first quarter of 2014 alone) and $641 billion in energy infrastructure investment required in the next 20 years, rumors of the death of Kinder Morgan's days of fast growth are greatly exaggerated.
With a 7.3% yield, management's guidance of 5% distribution growth (through 2016), and a track record of meeting or exceeding distribution guidance in 13 out of the last 14 years, income investors should consider Kinder Morgan Energy Partners one of the best income plays, not only for the Permian basin but for all of America's energy boom.
The Permian Basin represents one of America's largest energy resources, and companies such as Occidental Petroleum, Magellan Midstream Partners, and Kinder Morgan Energy Partners are racing to keep up with the energy bonanza. In the process they are enriching long-term income investors and achieving market-beating total returns that are likely to continue for years, or even decades, to come.
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